Don’t expect Gap Inc. (GPS) to return to growth in 2008.
That was the between-the-lines message from CEO Glenn Murphy, who delivered fourth quarter results on Thursday. “We know at some point, this business has to show improvement on the top line,” Murphy told analysts on a conference call after the markets closed. But Murphy made clear that the company’s priority for 2008 was to grow profits by better managing costs.
That strategy has so far delivered results for Gap, the $16 billion owner of the Gap, Old Navy and Banana Republic chains that once defined casual dressing before losing its way earlier this decade. Fourth quarter profit rose to $265 million, or 35 cents a diluted share, compared with $219 million, or 27 cents, the year earlier, largely because inventory and other expenses were kept in check. Gap’s inventory per square foot, for instance, was down by 15% at the end of the fourth quarter, compared with the same period a year ago.
The results pushed Gap shares higher by $1.15, or nearly 6 percent, to $20.60 in after hours trading.
But cost reductions and better expense management can only take Gap so far. If the San Francisco-based retailer is ever to emerge from the funk of the last few years, it will need to start growing sales. Fourth-quarter sales fell 5% to $4.68 billion, compared with $4.92 billion a year ago. Sales at stores open at least a year were down 3% in the period, compared with a 7% drop the prior year. The recently-completed fourth quarter contained one less week of sales than did the same period a year ago, partially accounting for some of the fall-off.
Gap does not provide sales guidance, but CFO Sabrina Simmons said that the challenging economic environment would make it more difficult for the company to grow comparable store sales this year.
As a result, Gap is proceeding cautiously with capital expenditures, which are expected to total $500 million this year, down from $682 million in 2007. The company plans to open 100 stores, mainly abroad, and close 85 locations, most of them Gap stores. In the United States, the company said it intends to be very “selective” about opening new stores, and is looking instead at making existing locations more profitable.
One way to keep investors happy in the absence of growth is to buy back stock. The company spent $613 million to repurchase 30 million shares in the fourth quarter, and authorized a new $1 billion buyback. Of that amount, about $158 million will be repurchased from the Fisher family, which founded Gap in 1969 and collectively owns slightly more than one-third of the company’s outstanding shares. Gap also said it would increase its annual dividend by 6% to 34 cents a share.
The company’s Gap and Old Navy brands are undergoing the biggest changes. Gap recently parted ways with Old Navy president Dawn Robertson over what Murphy called “philosophical” differences on how to move the brand forward. Current marketing did not focus enough on the brand’s value message, an imbalance that Murphy said he hopes to have adjusted by the back-to-school shopping season.
That is about the time that Old Navy’s newly installed creative director, the designer Todd Oldham, will start to have an impact on merchandise in the stores. A few months later, in the fall, designer Patrick Robinson’s new looks for Gap will start to hit store shelves. If the designers’ clothes connect with consumers, Gap stands to win big. Given its tighter expense structure, even the slightest improvement in same-store sales would provide a boost to the bottom line.
For now, however, Murphy is keeping expectations low. Gap and Old Navy have tried to reinvent themselves several times in the last few years to no avail. “It would be easy for us to get ourselves too excited too soon,” Murphy said.